“Deficiency” Defined

Many people wonder if they will owe any money to the lender after a foreclosure or a short sale. The answer is – “it depends”. It depends on what the lender can legally do under state and federal law, and it depends what negotiations, if any, took place between you and your lender. Further, it depends on what your original promissory note stated when you took out the loan (or loans) on your home.

Generally, a deficiency balance is the amount of money that remains due and owed to a lender after the collateral (the real estate or personal property) securing the loan is sold for less than the total amount due on the loan. In other words, it is the difference between what the seized or foreclosed property was sold for and the outstanding debt owed under the loan. If the secured property was sold for less than the amount owed on the loan, then the remaining balance is known as the deficiency balance.

Deficiency judgments sometimes pop up after a foreclosure or a short sale (where you sell your property for less than what you owe on it with prior approval from your lender). This is often occurs when sellers do not obtain legal advice in advance. The deficiency judgment comes as an unwelcome surprise at the exact moment that you finally think things are settled.

Deficiency After Foreclosure

In a foreclosure the bank puts your property up for auction. For example, if you owe the bank $100,000 under a delinquent home mortgage (including costs and fees), and the bank sells that home at a foreclosure for $80,000, the remaining $20,000 is the deficiency balance. Banks get the home in foreclosure when nobody bids enough to pay off the bank. The bank also has a right to sell the home for less to the highest bidder at the auction, but generally banks prefer to sell to a private party after the foreclosure, hoping to get more money on the open market.

Deficiency After Short Sale

While the home is pending foreclosure proceedings or it is in the pre-foreclosure stages, many banks agree to cut their losses and allow the homeowner to sell the property for less than they owe on it. Sometimes, the banks may even pay a homeowner to do this, but they need the right representation and professional on their side to negotiate such a deal. If the bank agrees to accept a buyer for a certain amount of money less than what is owed, in some states, the bank then has a right to go after the owner/seller for the deficiency.

For example, if you owe the bank $500,000 under a delinquent home mortgage (including costs and fees), and the bank sells that house for $450,000, the remaining $50,000 represents the deficiency balance under the short sale.

There are also tax consequences for these deficiencies. If the bank forgives the deficiency, it is considered income and subject to income taxes. However, until the end of December 2012, the federal government will let you slide and you won’t have to pay tax on this deficiency.

It goes without saying that proper legal advice is crucial to avoiding these unwelcome surprises. If you want professional legal assistance on this matter in New Jersey, with little to no cost to you, contact one of our Burlington County short sale lawyers to help.